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Eurozone banks 'need $840bn'

Gareth Hutchens

Dr Adrian Blundell-Wignall said if the world did not sort out its problems then Australia would not escape. Photo: Reuters

EUROPE will need a €700 billion ($A839 billion) capital injection to stabilise its banking system before it even thinks about getting out of the current crisis, an Organisation for Economic Co-operation and Development official has warned.

Adrian Blundell-Wignall, deputy director for financial and enterprise affairs at the OECD, said yesterday that Europe's banking system was so dysfunctional that it needed something like a troubled-asset relief program (TARP), similar to the one adopted by US policymakers in late 2008, to convince global markets that the region's banking crisis could be controlled. But the former Reserve Bank official said the OECD had calculated that the cost of such a program would be €700 billion - seven times the amount recently set aside to prevent the Spanish banking system from collapsing.

''It requires a TARP-style process to start now, starting with Germany and working south,'' Dr Blundell-Wignall told The Economist magazine's Bellwether Series 2012 conference in Sydney.

''Seven hundred billion euro is what you need to move the European banking system … to have a 5 per cent leverage ratio, which is what in the US you require [for] most banks to be what's called a 'well-capitalised bank'. If Europe was to move to be a well-capitalised banking system, that would be … what's required.''

Dr Blundell-Wignall said the history books would look back on this period and see that when the US financial system was in trouble, US authorities pumped capital into the system whether banks wanted it or not, and that helped to reduce banks' leverage ''the good way'', by raising capital levels without balance sheets having to fall.

''But in Europe it's like 'hear no evil, see no evil, speak no evil, there is no problem in European banking','' he said.

''[But] for this problem to go away, you have to take this banking system problem off the table first. This is going to take a very long time if they don't get on with it. This crisis will be around for a long time.'' Dr Blundell-Wignall said he also feared for Australia's housing market if global growth seriously faltered.

''The biggest problem in Australia, that worries me personally … is the Australian property market,'' he said.

''You'll never get an auction price collapse but nevertheless you can think Australian house prices will be going sideways in nominal terms or maybe down in nominal terms, and in real terms they'll be going down quite a bit over some years. You know, if unemployment rises, then that will accelerate.''

He said if the world did not sort out its problems then Australia would not escape.